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A digest of the China (Shanghai) Pilot Free Trade Zone Arbitration Rules: a more liberal development of arbitration practice in PRC

After splitting from the China International Economic and Trade Arbitration Commission (the CIETAC) through the notable “CIETAC split” event in 2012, the Shanghai International Economic and Trade Arbitration Commission (the SHIAC), or the Shanghai International Arbitration Center, formerly known as the Shanghai Sub-commission of CIETAC, has taken on several bold and innovative attempts aimed at becoming one of the most advanced arbitration institutes in P. R. China. These attempts include the diligent promulgation and revision of its own arbitration rules since the split from CIETAC, and the establishment of the China (Shanghai) Pilot Free Trade Zone Court of Arbitration (the Pilot Court) in October 2013.

The Arbitration Rules promulgated by SHIAC include the SHIAC Arbitration Rules effective from May 1, 2013 (the 2013 Rules), the China (Shanghai) Pilot Free Trade Zone Arbitration Rules (the 2014 Pilot Rules, or the Rules) and the SHIAC Arbitration Rules (the 2014 Rules), both effective from May 1, 2014.

The 2014 Pilot Rules, like the Pilot Court, are specially created and tailored for the Shanghai Free Trade Zone (FTZ) established in 2013 in Shanghai, PRC. In the meantime, the SHIAC also intended the Rules to have a much broader scope of application, which will be explained below.

The 2014 Pilot Rules have adopted arguably the most advanced international arbitration practices, representing a very positive and innovative development for the arbitration industry in China.

This article highlights some of the key features embodied in the 2014 Pilot Rules:

Scope of Application

As noted above, the 2014 Pilot Rules are specially tailored for arbitration related to the FTZ. The Rules expressly provide that they shall apply where parties have agreed to refer their disputes to SHIAC and there is a nexus to the FTZ. (Article 3: “…the parties or the subject matter to a dispute or the legal facts that lead to the establishment, change or termination of civil and commercial relationship are connected with the FTZ.”)

In addition to the above, the Rules can also apply to non-FTZ related cases upon the election of the parties. For example, for parties outside the FTZ that intend to benefit from the liberal 2014 Pilot Rules, instead of choosing the regular SHIAC arbitration rules, i.e. the 2014 Rules, they may agree to refer their disputes to SHIAC for arbitration and apply the 2014 Pilot Rules.

Pro-Arbitration Interpretation of “Defective” Arbitration Clause

Under PRC law, an arbitration clause must contain the parties’ specific designation of an arbitration institute to become valid and enforceable, which means ad hoc arbitration is not recognized in China. In contrast, the 2014 Pilot Rules adopt a rather pro-arbitration approach to interpret arbitration clauses that fail to name the arbitration institute. Article 3(4) provides that the Rules shall apply where the parties agree to arbitrate in accordance with the Rules but have failed to name the arbitration institute.

While the requirement of PRC law on the designation of arbitration institute reflects a specific jurisdictional feature, the approach of the 2014 Pilot Rules represents a more internationally acceptable practice.

Open Panel of Arbitrators

Like the other Chinese arbitration institutes, SHIAC also has an established panel of arbitrators from whom the parties may choose. Currently, the commission has a panel of 625 arbitrators, including 199 from 37 foreign countries and regions. Most Chinese arbitration institutes employ “closed pool” panelist of arbitrators and do not encourage or allow parties to choose arbitrators from outside the established panel.

The 2014 Pilot Rules, however, expressly allow the parties to choose arbitrators from outside the established panel, thereby changing the nature of the panel from a “closed pool” to an open one. However, any arbitrator who is selected by a party but not on the panel is subject to final confirmation by the commission in order to guarantee the quality of the selected arbitrator(s).

Needless to say, this liberal approach toward the parties’ selection of arbitrators greatly enhances the parties’ autonomy over the arbitration process and will certainly encourage the involvement of more sophisticated international arbitration practitioners in China. Another positive effect is that foreign companies doing business with Chinese partners will have less fear or concern about submitting their disputes to arbitration in China, since they now stand a much greater chance of being able to select arbitrators about whom they feel comfortable.

Interim Measures and Urgent Tribunal

The 2013 and 2014 Rules only provide that the commission will forward the parties’ request for preservative measures (of property or evidence) to the competent People’s Court for handling. In contrast, the 2014 Pilot Rules install a whole and detailed chapter on the interim measures that include not only property or evidence preservation, but also measures that permit one party to perform or prevent one party from performing certain acts.

The expansion of the scope of interim measures largely responds to the parties’ need to protect their intellectual property rights. For instance, with the aid provided under the 2014 Pilot Rules, a foreign party may apply to the SHIAC and request an order to prevent another party from infringing the applicant’s IP rights, during or before the arbitration proceedings.

If the request for interim measures is filed before the formation of the arbitral tribunal, the commission will, upon application by the parties, decide whether to form an urgent tribunal to rule on the request. If yes, the commission will, within three days after the submission of advance payment and other required formalities by the parties, appoint one arbitrator from the panel to rule on the request for interim measures.

If the request for the interim measures is filed after the formation of the arbitral tribunal, the commission may forward the request to the appropriate People’s Court or the arbitral tribunal for decision.

The urgent tribunal upon its formation, or the arbitral tribunal upon receipt of a request, shall render a ruling on the request for interim measures within 20 days (or 10 days if security is provided by the concerned party).

The concerned parties shall comply with the final decision of the urgent tribunal or the arbitral tribunal.

The urgent tribunal shall dissolve upon the formation of the arbitral tribunal and transmit the case files to the arbitral tribunal. Unless otherwise agreed by the parties, the arbitrator of the urgent tribunal shall not become a member of the arbitral tribunal.

The provision of pre-arbitration relief to parties in such urgent circumstances and the confirmation of the urgent/arbitral tribunal’s power (as authorized by the commission) to rule on the request for interim measures, are quite bold and innovative developments made in the 2014 Pilot Rules, which not only echo prevailing international arbitration practices, but also serve to reduce costs and amount of resources as compared to a court proceeding which would be presided over by a court judge who is completely new to the case and in no better position than the urgent/arbitral tribunal to rule on the request.

Joinder of Third Parties

In the 2013 and 2014 Rules, the provisions on the joinder of third parties are quite general. In contrast, the 2014 Pilot Rules distinguish third parties that are signatories to the arbitration agreement from those parties who are not and set forth in detail rules on how to join signatory third parties to the pending arbitration proceedings. Regardless of whether the third party is a signatory or not, the Secretariat (before the formation of the tribunal) or the arbitral tribunal (upon its formation) has the right to permit or disallow an application for a joinder. The clarification of the rules on the joinder of third parties will improve the efficiency of arbitration proceedings and help to avoid potential parallel or repetitive proceedings.

Evidence

There are no rules of evidence mandatorily applicable to an arbitration, whether under the 2013 Rules, 2014 Rules or the 2014 Pilot Rules. However, improvement made in the 2014 Pilot Rules (as well as in the 2014 Rules) is that they expressly recognize the parties’ choice/agreement on which rules of evidence will be applicable to them. Article 44(4) of the 2014 Pilot Rules provides that where the parties have agreed on matters or rules relating to evidence, the parties’ agreement shall prevail except where such agreement is inoperative.

Such improvement reinforces the principle of party autonomy in arbitration practices. The parties will be able to tailor their own evidence rules and abandon unnecessary formalities, such as notarization, translation, etc. which are often required in court proceedings. The parties may also incorporate the whole or part of the IBA Evidence Rules that are widely accepted by common law practitioners.

Pre-arbitration Mediation

Mediation has been a long-existing dispute resolution mechanism encouraged in Chinese culture and judicial system. Arbitration in China also reflects such characteristics. For instance, almost all the Chinese arbitration rules encourage arbitrators to mediate the disputes where they see fit. Such dual identities serving as both the arbitrator and the mediator may seem efficient and cost-saving at its face, but actually have the shortcoming of the arbitrator’s mind being colored/tainted after conducting the mediation procedure; hence he or she can no longer be impartial during the subsequent arbitration proceedings.

To overcome this shortcoming, the 2014 Pilot Rules create a separate mediation procedure available before the composition of the arbitral tribunal. SHIAC also provides a mediators’ panelist for this purpose. To avoid the dual identities problem, Article 50(7) of the Rules expressly requests that unless the parties agree in writing, the appointed mediator shall not become the arbitrator of the same case.

Award Ex Aequo Et Bono

Another highlight of the 2014 Pilot Rules is that arbitrators are allowed to award ex aequo et bono, i.e. to decide the dispute in accordance with equitable principles and common good, and not be bound by legal rules. The preconditions to decide ex aequo et bono are that, first, the parties have expressly empowered the arbitrators to do so either in the arbitration agreement or in a written application submitted during the arbitration proceedings, and second, such decision would not violate any mandatory provisions of law or public policy.

The 2014 Pilot Rules do not clarify on the scope of the “mandatory provisions of law and public policy.” A safe and reasonable interpretation would encompass those applicable in the jurisdictions where the award is rendered and where the award will be enforced.

Unfortunately, the principle of award ex aequo et bono is not recognized under PRC law, so there will be difficulties in enforcing such an award in China. This does not, however, deny the value of the inclusion of award ex aequo et bono in the 2014 Pilot Rules, since first, this principle has been recognized by most advanced international arbitration rules and acceptable to the international arbitration community, second, it will not become an obstacle to the enforcement of an award where the enforcement is sought in a place that recognizes such principle, and third, to decide and resolve a dispute according to equitable principles and common good complies with the doctrine of natural law and is able to overcome the inherent shortcomings of jurisdictional laws.

Procedures for Small Claims

In the regular SHIAC arbitration rules, i.e. the 2013 Rules and the 2014 Rules, there is only a set of Summary Procedures available to parties with claims smaller than RMB 1million. The 2014 Pilot Rules further split from the Summary Procedures those claims smaller than RMB 100,000 and subject those claims to a special set of “Procedures for Small Claims.”

The creation of Procedures for Small Claims will benefit small and mid-size enterprises for they require much lower service fees and guarantee quicker resolution of disputes. Unlike the regular time limitation of six months for rendering the final award (four months for domestic disputes, three months for Summary Procedures), the Procedures for Small Claims request the sole arbitrator to issue a final award within 45 days upon formation of the tribunal.

It should be noted that the Procedures for Small Claims only apply to domestic disputes, while the Summary Procedures are available to all types of disputes.

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